The impact of redundancy on pensions

Those who have had their contracts of employments terminated and have been made redundant should be provided with leaving service options by their scheme administrator. They may also be entitled to a redundancy payment. Full-time employees paying Class A PRSI who have worked continuously for their employer for at least 104 weeks (2 years) will normally qualify for Statutory Redundancy. Employers may also at their discretion make ex gratia redundancy payments to employees being made redundant.

How Ex Gratia Payments work

There are 3 possible exemptions to taxation on Ex Gratia payments which are known as the Basic Exemption, Increased Exemption and the Standard Capital Superannuation Benet (SCSB). The highest available exemption could be applied to an Ex Gratia payment.

Basic Exemption

The Basic Exemption is €10,160, plus €765 for each complete year of service.

Increased Exemption

The Increased Exemption is the Basic Exemption plus an additional €10,000 but less the value of any pension lump sum received or to be received under an occupational pension scheme linked to this employment.

Standard Capital Superannuation Benet (SCSB):

The SCSB is a tax relief that normally benets people with higher earnings and long service. It can be used if the below formula gives an amount greater than the Basic Exemption or the Increased Exemption.

where:

A: is the average annual remuneration for the last 36 months service

B: is the number of complete years of service

C: The amount of any tax-free lump sum received or to be received under the occupational pension scheme (if any)

Any ex gratia payments in excess of the highest available exemption would be taxable at the marginal rate of the individual. There is also a lifetime limit on Tax Free Ex Gratia payments of €200,000.

Example – John

• 15 years’ service

• Salary of €52,000 per annum for last three years

• Value of Future Pension Lump Sum: €30,000

John’s employer is oering a voluntary redundancy package of 6 weeks of pay for every year of service which John has accepted. The payments are broken down as follows:

We now calculate the value of the available exemptions, which will be impacted by whether or not John decides to waive or retain his right to a pension lump sum under the scheme.

In both instances the SCSB provides the highest available exemption.

On this basis the taxation of the total package would be as follows: